Abnormal Loss :: Accounting Treatment

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Abnormal Loss » Related Quantities & Values  
 

Quantity
(Units)
Value
(Rs.)
Rate
(Rs./Unit)
Gross Input 1,000 1,00,000 100
Less: Abnormal Loss 100 10,000 100
Net Output 900 90,000 100

The abnormal loss in quantity terms should be deducted from the gross input to obtain the Normal (net) Output
[Normal Output = Gross Input − Abnormal Loss Units]

The cost of abnormal loss units should be deducted from the total cost to obtain the Normal (net) Cost.
[Normal Cost = Total Cost − Cost of Abnormal Loss Units].

Caution

The rate column is always to be obtained as a quotient using the relation Value ÷ Quantity.

Abnormal Loss » Accounting Treatment  
 
Total cost is debited to the Process a/c. Cost of abnormal loss is deducted from the total cost to obtain the normal cost.

Deducting from the debit side item is the same as Crediting the Item.

Therefore, "Abnormal Loss" both in terms of units and value is recorded by

  • Crediting the "Process " a/c and
  • Debiting the "Abnormal Loss a/c"

The units are also shown along with it in the relevant column.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 10,000
10,000

DrProcess A a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Input

1,000

1,00,000

By Abnormal Loss a/c
By Process B a/c

100
900

10,000
90,000
  1,000 1,00,000   1,000 1,00,000
           

DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Process A a/c

100

10,000





           
           

Expenditure incurred on Abnormal Loss Stock » Increase in Value  
 
In general, the abnormal loss stock is valued at cost.

Where repairs are carried on or where the abnormal loss stock is further processed to convert it into some other form, the expenditure incurred is to be treated as the capital value of the asset identified as "Abnormal Loss" and is to be debited to that account.

Thus, the additional expenditure incurred is debited to the "Abnormal Loss a/c".

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
xx/xx/xxxx Dr 2,300
2,300

DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process A a/c
To Cash/Bank a/c
100
10,000
2,300





           
           

Recovery of Abnormal Loss » Insurance, Disposal/Sale  
 
In recording the value of normal loss we can assume that we are creating an asset by the name "Abnormal Loss".

The value of this asset is equal to its cost. This value is the actual value incurred in acquiring the stock lost on account of abnormal reasons.

The value may be enhanced on account of the expenditure incurred on it.

The most common routes available for recovering the value of abnormal loss stock are

  • Sale of the abnormal loss stock (if they are in a saleable condition)
  • Insurance realisation (if the stock lost had been insured)
  • Sale by repairing the abnormal loss stock (if possible and feasible)
  • Sale by converting the abnormal loss stock to some other form (if possible and feasible)

The total amount realised through all these means may be equal to, more than or less than the value of the abnormal loss stock.

Thus, on disposal of abnormal loss stock there may be (a) Gain (b) Loss and (c) Neither Gain nor Loss

Sale of Salvaged Stock  
 
Salvaged = Save from ruin or destruction
= Collect discarded or refused material

The salvaged stock (abnormal loss stock) may be sold as it is or by improving its value by incurring additional expenditure on it.

Generally, the price at which the abnormal loss stock is sold is far less than the price at which the good stock is sold. There may be exceptional cases where it may not be so.

Assuming 50 units are sold for Rs. 2,000 (50 units × Rs. 40/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 2,000
2,000

DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process A a/c 100
10,000
By Cash/Bank a/c

50
2,000
           
           

Insurance Realisation  
 
This is the amount that the insurance company would be paying (or accepting to pay) to make good the loss incurred on the abnormal loss stock.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 1,500
1,500

DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process A a/c
100
10,000
By Bank/Ins. Co a/c


1,500
           
           

Insurance Company indemnifies the loss

The amount paid (accepted to be paid) by the insurance company would be dependent on a number of factors like the insurance agreement, the quantum of stock insured, the magnitude of loss, etc. Since the contract of insurance is a contract of indemnity (not a contract of guarantee), we cannot assume the insurance company to be paying an amount greater than the actual net loss incurred.
Indemnity = A sum of money paid in compensation for loss or injury
= Protection against future loss

Can't there be insurance realisation on Normal Loss Stock

The insurance company can make profits only if the loss does not occur in all cases. This is not possible if the insurance company insures normal loss. Normal Loss by its nature itself occurs every time the transaction takes place. Thus, when we talk of insurance of loss, we mean abnormal loss and not normal loss.

Profit on Disposal/Sale of Abnormal Loss Stock  
 
There would be a profit on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is more than its value.

The profit being abnormal in nature is transferred to the "Costing Profit and Loss a/c"

Assuming 40 units whose value is Rs. 4,000, are disposed at a total Realisation of Rs. 4,800

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 800
800

DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process A a/c
To Costing P&L a/c
100
10,000
800
By Cash/Bank/Dr. a/c
By Bank/Ins Co. a/c
By bal c/d
40

60
2,300
2,500
6,000
  100 10,800   100 10,800
To bal b/d 60 6,000      

DrCosting Profit & Loss a/c Cr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)




By Abnormal Loss a/c



800
           
           

Note

  1. Profit or loss is assessed by taking only the value of 40 units into consideration.

    Profit = Rs. 800 (Rs. 4,800 − Rs. 4,000).

  2. Since only 40 units are disposed, the value of the other 60 units would be retained in the Abnormal Loss a/c, till they are disposed.
  3. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.

Loss on Disposal/Sale of Abnormal Loss Stock  
 
There would be a loss on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is less than its value.

The loss being abnormal in nature is transferred to the "Costing Profit and Loss a/c"

Assuming 100 units whose value is Rs. 10,000, are disposed at a total Realisation of Rs. 6,000.

Journal in the books of M/s __ for the period from ____ to _____
Date V/R No. L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
30/06/2006 Dr 4,000
4,000

DrNormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
100
10,000
By Cash/Drs a/c
By Costing P&L a/c
100
6,000
4,000
  100 10,000   100 10,000
           

DrCosting Profit & Loss a/c Cr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)

To Abnormal Loss a/c


4,000






           
           

Note

  1. Profit or loss is assessed by taking the value of all the 100 units into consideration since all of them are disposed off.

    Loss = Rs. 4,000 (Rs. 10,000 − Rs. 6,000).

  2. Since all the units are disposed, there would be no value left in the abnormal loss account.
  3. At the end of the accounting period, there would be no asset (named Abnormal Loss) to be shown in the balance sheet.

Disposal/Sale of Abnormal Loss Stock without Gain/Loss  
 
There would be no gain or loss on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is equal to its value.

Assuming 75 units whose value is Rs. 7,500, are disposed at a total Realisation of Rs. 7,500.
DrAbnormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
100
10,000
By Cash/Drs a/c
By Bank/Ins Co. a/c
By bal c/d
75

25
2,500
5,000
2,500
  100 10,000   100 10,000
To bal b/d 25 2,500      

Note

  1. Since only 75 units are disposed off, the value of the other 25 units would be retained in the Abnormal Loss a/c, till they are disposed.
  2. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.

Influence of Losses on Costs  
 
In arriving at the cost of manufacturing a product or service, only normal costs are to be considered as being part of cost. The costs should not be influenced by abnormal natured losses and costs.

Therefore the value of losses should be eliminated from the total costs.

Since all costs are debited to the process account, eliminating a value implies either deducting from the debit side or crediting the process account with the value.

DrProcess A a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)

To Input
[Includes Ab. Loss:
100 units; Cost : 10,000]

1,000

1,00,000
By Abnormal Loss a/c

By Bal c/d
[Includes Ab. Loss:
0 units Cost : 0]
100

900
10,000

90,000
           
           

With regard to abnormal loss, it is to be understood that no part of its value (cost) should be borne by good production.

Therefore we eliminate the total cost/value (Rs. 10,000) of the abnormal loss stock from the process account.

Author Credit : The Edifier ... Continued Page 8

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